The Very Last "Stimulus" Card For Obama To Play

Wikimedia CommonsAfter getting drubbed in the debt ceiling fight -- a result that's both bruising politically and bruising to the economy at the worst time -- Obama desperately needs an economic turnaround in the next year.

Unfortunately, things are going in the wrong direction, and the fundamental reasons for the weakness (ongoing deleveraging) make it hard to believe in an imminent recovery.

And there's there's probably a lot that could be done, but a Republican Congress committed to preventing Obama's re-election make the odds of getting anything substantial passed really low.

The one thing he might be able to pull off: A holiday on repatriated cash held overseas by large corporations.

If you're not familiar with the notion, it's this: Large corporations make a lot of money overseas that they don't end up using domestically, because they must pay a tax bill on that cash. So it just "sits there" or sometimes gets used to make acquisitions of foreign companies.

Advocates say that one way to create jobs would be to eliminate this tax, or at least temporarily suspend it.

And there's a decent chance that because it wouldn't add to the deficit, and because business likes it, that something like this could get passed, even in this Congress.

Sound good?

Well, the truth is that we actually tried this before under the last stimulating President (Bush) with the Homeland Investment Act of 2004. And it flopped.

This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

It's pretty safe to assume that this would be the case again this time around. The biggest reason companies aren't investing or hiring more isn't that they're cash-constrained, it's that demand is weak. So there's no logical reason that a windfall of cash to corporations would result in more investment.

Of course, just because it might not have an effect on the real economy, doesn't mean it won't be good for investors (remember quantitative easing?).

Shareholders in big tech companies like Microsoft and Cisco have clamored for more buybacks/dividends, and a foreign cash repatriation holiday would definitely improve the prospects of that.

So far The White House hasn't endorsed this idea, except as part of a broader tax-reform agenda. The Treasury spelled out its view here on the matter, basically making the same point above, that it hasn't worked in the past.

But if the administration is getting panicky, and wants some "wealth effect" this is a lever they can pull.